'Unemployment is structural'
South Africa's unemployment crisis was structural in nature and caused by unsustainable imbalances between production and consumption, Trade and Industry Minister Rob Davies said yesterday.
Even at the height of the pre-crisis boom between 2005 and 2007, unemployment never fell below 22.8 percent under this growth path, Davies told an Association of Real Estate Licence Law Officials (Arello) conference.
Davies said even before the crisis, when the South African economy recorded its longest period of sustained economic growth, this growth was fuelled by an unsustainable credit-driven boom.
The consumption side of the economy grew at double the rate of the production side between 1994 and 2008, which had significant implications for the property market.
It also led to unsustainable imbalances, particularly a growing trade deficit externally financed by short-term capital inflows associated with the global commodities boom.
Davies said to address this problem, the government, together with business and labour, must facilitate diversification of the economy beyond its current reliance on traditional commodities and non-tradable services.
This required the promotion of increased value addition per capita characterised particularly by movement into non-traditional tradable goods and services that competed in export markets as well as against imports.
Davies said the government's latest industrial policy action plan, Ipap2, was fundamentally designed to help build South Africa's industrial base in critical sectors of production and value-added manufacturing, which would contribute to the reduction of chronic unemployment.
Davies believes South Africa had a speculative asset bubble in real estate during the period 2003 to 2007.
He said banks were providing an increased amount of loans for house buying and the number of people buying second and third homes for speculative reasons increased.
He said the US subprime meltdown was essentially the result of banks and mortgage companies overextending credit to lower income people.
South African banks started to emulate the behaviour of their US counterparts by increasing their leverage, loosening lending criteria and giving people loans for up to 115 percent of the values of their property.
The National Credit Act was introduced precisely because of government concerns that financial institutions were entering into abusive credit relationships with their clients.
Davies said South Africa might not have had a financial meltdown, but the misallocation of finance to speculative activities in real estate and extending high levels of credit for consumption had a hugely negative impact on the economy.
It had left the country less able to respond rapidly to the financial crisis because it had lost ground in industry and other productive sectors.
This meant the property industry would have to engage in some significant adjustments. He challenged real estate professionals to think about how they contributed to the collective effort to address the structural imbalances as a result of past actions.
Davies said the government was broadly supportive of not shutting the South African market to foreign buyers but foreign direct investment in property had a much lower priority than foreign direct investment in productive sectors.
"Investment in productive sectors will create jobs whereas investment that will cause our land to be sold off and may even promote speculative bubbles in real estate prices is clearly unattractive in terms of the current needs and growth trajectory of our economy."
Article by: Roy Cokayne - www.busrep.co.za